In most cases, payments to employees under a health reimbursement account  are not taxed by the IRS. Most cases – but not all.

Examples of HRA designs that don’t qualify for tax breaks:

• plans that cover only health care, but reimburse employees all or a portion of their unused money at the end of the year
• plans that provide a death benefit to employees’ dependents from unused funds, if the money isn’t limited to reimbursing their medical expenses, and
• plans that permit unused account dollars to count as “credit” toward other company benefits (example: a 401(k) contribution).

Note: These rules don’t apply to flexible spending accounts (FSAs) in Section 125 cafeteria plans, as long as unused flex account money is not applied from one plan year to the next.

With an HRA, an employer can’t reimburse employees for non-medical expenses. If you do, even payments for otherwise eligible medical expenses can become taxable as a form of deferred comp.